Congress, FASB Grappling with Pensions

The Senate and House must reconcile their retiree-benefit funding bills and meld the result with a major pension-accounting proposal.
David KatzJune 14, 2006

Washington’s difficulties in hammering out a major funding bill before the July 4 recess have been complicated by the Financial Accounting Standards Board’s pension-accounting project, the chairman of a joint Senate-House committee suggested on Wednesday.

Sen. Mike Enzi (R-Wyo.) made his observation during a hearing by the Senate Banking, Housing, and Urban Affairs Committee on FASB’s proposed standard on employer accounting for defined-benefit plans. Reconciling the efforts of FASB and Congress has been so difficult, said Enzi, because pension-funding rules under the Employee Retirement Income Security Act and the Internal Revenue Code are much different than pension-accounting standards under generally accepted accounting principles.

To be sure, the tasks of FASB and the joint congressional committee “are not being done in opposition to each other, they are being done in conjunction with each other,” said Enzi. “But care has to be taken so that one is not undoing the process of strengthening what the other is doing.”

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Reconciling the House and Senate versions of the bill has been difficult enough in itself, owing to a legacy of generations of pension law, according to Enzi, who is also chairman of the Senate Committee on Health, Education, Labor, and Pensions. “This would be a whole lot easier if we were initiating the policy for pensions,” he said, adding, “our option isn’t to start over, our option is to transition, so people that worked hard in anticipation that they will retire, can retire.”

Enzi also voiced a widely held corporate concern that the transition to a new pension law and new accounting rules should not be so bumpy that it induces some companies to stop offering benefits altogether. Sen. Paul Sarbanes (D-Md.), the committee’s ranking Democrat, addressed that issue during the testimony of FASB Chairman Robert Herz and International Accounting Standards Board Chairman Sir David Tweedie. Sarbanes asked Herz and Tweedie whether putting pension liabilities and assets on their balance sheets might result in some companies being “catapulted into the red in a substantial manner.”

Herz replied that phase one of FASB’s proposal was limited to putting pension accounting on corporate balance sheets, while most of the controversy surrounding the proposal centered on “what are you going to do with reported earnings” when it comes to pension results. To prepare for phase two — which contemplates more-radical steps, such as the elimination of “smoothing” for pension-investment results — Herz suggested that companies could inject funds into their plans. Another prudent step, he added, would be for companies to take more care in matching investment choices to liabilities and invest, for example, “in less equities and more bonds.”

Tweedie testified that a number of British companies are already making such changes. For example, British Airways, which a few years ago found itself with a pension deficit of $2.4 billion — 44 percent of its market capitalization — has stopped paying dividends “because they feel they have to fill this hole to put more money into the fund and are suggesting employees will work longer,” he observed.

In response to questions from the senators, Herz and Tweedie each laid out a tentative schedule for their boards’ pension efforts. Herz said FASB would begin final deliberations on phase one over the summer and issue a final standard by the end of the third quarter. The standard for phase two might take as long as three years to complete, followed by additional time to reconcile the FASB and IASB versions into a complete global standard, he added.

Tweedie said that FASB is “leapfrogging” IASB regarding the first phases of the two boards’ pension-accounting projects. He also observed, however, that the time lines of the two projects differ, so each board will be able to learn from the other; for example, IASB plans to address smoothing as part of its first phase. “The work we will do is helping FASB, and the work FASB is doing will help us,” he said.